Can a county's bank depository pledge Fannie Mae mortgage pass-through certificates as collateral for county deposits?

Texas AG Opinion JM-1033: Can a County Pledge Fannie Mae Certificates as Collateral?

Plain-English summary

When a county keeps its money in a bank, the law does not just trust the bank to hold it. The bank has to post collateral, safe securities pledged to the county so that if the bank fails, the county's money is protected. This opinion answers a narrow question about what counts as acceptable collateral: can the bank pledge Fannie Mae mortgage certificates?

The wrinkle is that Fannie Mae paper is not quite a Treasury bond. The certificates here were Federal National Mortgage Association Guaranteed Mortgage Pass-Through Certificates, and their own prospectus said, in capital letters, that Fannie Mae's guaranty was an obligation of the corporation alone and was "not backed by the full faith and credit of the United States." The Dallas County Auditor, through the District Attorney, wanted to know whether that mattered.

The Attorney General walked through two overlapping statutes. Chapter 116 of the Local Government Code sets out how a county depository secures county funds. One section, 116.054, lists specific kinds of securities a depository can pledge, and its first category is federal obligations that are either backed by the full faith and credit of the United States or guaranteed as to principal and interest by the United States. Fannie Mae certificates fail that test, because (as the prospectus admits) they carry no U.S. full-faith-and-credit backing.

That is not the end of the story, though, because section 116.051 offers a second path. It lets a depository secure county funds with "investment securities" as defined in another statute, article 2529b-1 of the Vernon's Texas Civil Statutes. And that statute is where Fannie Mae fits. Its definition of "government securities" specifically lists participation certificates guaranteed by the Federal National Mortgage Association. The Attorney General had to untangle a long, badly punctuated sentence to see it (a lengthy parenthetical about Federal Home Loan Banks interrupts the list), but once the sentence is read sensibly, Fannie Mae certificates are "government securities," which makes them "investment securities." Section 2 of the same article then declares that investment securities, and any ownership or beneficial interest in them, are eligible and lawful security for all deposits of public funds of any "public agency." Counties are public agencies under the statute.

The Attorney General grounded the result in legislative intent rather than punctuation (a separate statute says punctuation does not control the meaning) and pointed out that the Legislature plainly wanted public deposits secured by safe obligations. Federal law pushed the same way: 12 U.S.C. § 1723(c) makes Fannie Mae certificates lawful investments and acceptable security for public funds. So the answer was yes, the depository for Dallas County could pledge these certificates to secure county deposits.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The statutes on county depositories and eligible collateral (Local Government Code chapter 116 and the old article 2529b-1, V.T.C.S.) have been amended and recodified since 1989, and the status and structure of Fannie Mae itself changed substantially after the later federal financial-crisis reforms and its conservatorship. Anyone deciding what collateral a county depository may pledge today should check the current statute rather than rely on the 1989 article numbers and definitions used here.

Who this opinion affected (as of 1989)

County commissioners courts and auditors: The opinion told them that Fannie Mae pass-through certificates were acceptable collateral for county deposits, even though the certificates lacked a full-faith-and-credit federal guaranty.

Banks serving as county depositories: The opinion widened, at least by confirmation, the menu of securities a depository could pledge, letting banks use Fannie Mae paper they already held to satisfy their collateral obligation.

Anyone tracking the safety of public funds: The opinion reflected the Legislature's aim of securing public deposits with safe obligations and read the eligible-collateral statutes with that purpose in mind, rather than reading a punctuation quirk to exclude a security Congress had already blessed for public funds.

Common questions

Do Fannie Mae certificates have to be backed by the U.S. government to serve as county collateral?
No. The Attorney General concluded that although the certificates are not backed by the full faith and credit of the United States and so fail the specific federal-obligation category in section 116.054(a)(1), they still qualify as "investment securities" under article 2529b-1, V.T.C.S., which section 116.051 allows.

Why do the certificates count as "government securities"?
Because article 2529b-1 defines "government securities" to include participation certificates guaranteed by the Federal National Mortgage Association. That makes them "investment securities" under the same statute.

Are counties covered by the investment-securities statute?
Yes. The Attorney General concluded counties are "public agencies" within the meaning of article 2529b-1, section 1(c), and section 2 makes investment securities eligible and lawful security for all deposits of public funds of any public agency.

Did the confusing wording of the statute change the answer?
No. The Attorney General read the statute for its legislative intent to protect public funds with safe obligations and noted that punctuation does not control the meaning (Gov't Code § 312.012(b)).

Background and statutory framework

At the Dallas County Auditor's request, the District Attorney asked whether Federal National Mortgage Association Guaranteed Mortgage Pass-Through Certificates could be pledged by the depository for Dallas County as security for the deposit of county funds. The certificates' prospectus stated in prominent type that Fannie Mae's guaranty obligations are solely the corporation's and are not backed by the full faith and credit of the United States, and that the certificates are exempt from Securities Act of 1933 registration and are "exempted securities" under the Securities Exchange Act of 1934. The certificates are issued and guaranteed by Fannie Mae under section 304(d) of the Federal National Mortgage Association Charter Act (12 U.S.C. § 1716 et seq.), and each certificate represents an undivided interest in a pool of residential mortgage loans, with the corporation obligated to distribute scheduled monthly principal and interest to certificate holders whether or not received.

The statutes governing depositories for county funds are in chapter 116 of the Local Government Code, with the security provisions in subchapter C. Section 116.051 requires a bank selected as county depository to qualify within 15 days by providing security for the funds, and lets the depository secure them, at the commissioners court's option, by (1) personal bond, surety bond, "bonds, notes, and other securities," first mortgages on real property, real property, or a combination, or (2) investment securities or interests in them as provided by article 2529b-1, V.T.C.S. (Chapter 726, Acts of the 67th Legislature, Regular Session, 1981). Section 116.054 narrows the broad "bonds, notes, and other securities" language of subsection (1); its subsection (a)(1) covers a federal evidence of indebtedness only if it is supported by the full faith and credit of the United States or is guaranteed as to principal and interest by the United States. The certificates satisfied none of the section 116.054 categories, so they could qualify only as "investment securities" under section 116.051(2).

Article 2529b-1, V.T.C.S., defines "government securities" to include direct obligations of the United States, obligations the U.S. attorney general opines are general obligations backed by full faith and credit, obligations guaranteed by the United States, and evidence of indebtedness of or participation certificates guaranteed by a list of federal credit entities, "Federal National Mortgage Association" among them. The Attorney General noted the sentence's syntax is complex and concluded it should be read as though a long phrase about Federal Home Loan Banks (letters of credit and general obligation notes and bonds of that system) were set off by parentheses, so that it does not interrupt the list of entities whose participation certificates are government securities. Read that way, certificates guaranteed by the Federal National Mortgage Association are "government securities" and thus "investment securities" under section 1(b). Section 2 declares that investment securities, or any ownership or beneficial interest in them, are eligible and lawful security for all deposits of public funds of the State of Texas and any public agency, to the extent of market value, and section 3 makes the article full authority for such collateral without reference to any other law. Counties are "public agencies" within the meaning of the act (article 2529b-1, § 1(c)).

The Attorney General rested the conclusion on legislative intent: punctuation does not control (Gov't Code § 312.012(b)), and it is the duty of courts and of the AG's office to give statutes a reasonable, fair construction to accomplish that intent (see 53 Tex. Jur.2d Statutes § 126). The evident intent was to protect public funds by requiring that deposits be secured by safe evidences of obligation. Reinforcing the conclusion that the Legislature regarded Fannie Mae certificates as safe, federal law provides that such certificates "shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds," 12 U.S.C. § 1723(c). Accordingly, the certificates could be pledged by the depository for Dallas County as security for the deposit of county funds. (The Attorney General added a note that the 1987 non-substantive recodification into the Local Government Code preserved a same-session amendment to former article 2547 authorizing banks to pledge certain certificates of deposit, which did not conflict with the code or affect the answer, citing Gov't Code § 311.031(c), (d).)

Citations

Statutory authority:

• Local Government Code § 116.051 (county depository must provide security; may use listed methods or investment securities under article 2529b-1)
• Local Government Code § 116.054 (specific securities a depository may pledge; subsection (a)(1) federal obligations must carry U.S. full faith and credit or guaranty of principal and interest)
• article 2529b-1, V.T.C.S. (Chapter 726, Acts of the 67th Legislature, Regular Session, 1981) (defines "government securities" to include Fannie Mae participation certificates; investment securities are lawful collateral for public funds; counties are "public agencies")
• Gov't Code § 312.012(b) (punctuation does not control statutory meaning)
• Gov't Code § 311.031(c), (d) (effect of amendments made in the same session as a codification)
• 12 U.S.C. § 1716 et seq. (Federal National Mortgage Association Charter Act; § 304(d) authority for the certificates)
• 12 U.S.C. § 1723(c) (Fannie Mae certificates are lawful investments and acceptable security for public funds)
• 53 Tex. Jur.2d Statutes § 126 (statutes construed reasonably to accomplish legislative intent)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1033
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1033.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative.

THE ATTORNEY GENERAL OF TEXAS

March 28, 1989

Honorable John Vance
District Attorney
Dallas County
Government Center
Dallas, Texas 75202

Opinion No. JM-1033

Re: Whether Federal National Mortgage Association (Fannie Mae) Guaranteed Mortgage Pass-Through Certificates may be pledged as security for county deposits (RQ-1611)

Dear Mr. Vance:

At the request of the Dallas County Auditor, you have asked whether Federal National Mortgage Association Guaranteed Mortgage Pass-Through Certificates may be pledged by the depository for Dallas County as security for the deposit of county funds placed with the depository. You have furnished excerpts from the prospectus concerning the certificates.

The Federal National Mortgage Association is popularly known as "Fannie Mae," and it has incorporated that sobriquet into its prospectus. In prominent, large type the prospectus declares:

THE OBLIGATIONS OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION UNDER ITS GUARANTY ARE OBLIGATIONS SOLELY OF THE CORPORATION AND ARE NOT BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES. THE CERTIFICATES ARE EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ARE 'EXEMPTED SECURITIES' WITHIN THE MEANING OF THE SECURITIES EXCHANGE ACT OF 1934.

It further states:

The Guaranteed Mortgage Pass-Through Certificates ('Certificates') are issued and guaranteed by the Federal National Mortgage Association (the 'Corporation' or 'Fannie Mae'), a corporation organized and existing under the laws of the United States, under the authority contained in Section 304(d) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1716 et seq.).

Each certificate offered hereby and by the Supplement related hereto will represent an undivided interest in a pool of mortgage loans (a 'Pool') to be formed by the Corporation. Each Pool will consist of residential mortgage loans ('Mortgage Loans') either previously owned by the Corporation or purchased by it in connection with the formation of the Pool.

. . . .

Interests in each Pool will be evidenced by a separate issue of Certificates.

. . . .

The Corporation will have certain contractual servicing responsibilities with respect to each Pool. In addition, the Corporation will be obligated to distribute scheduled monthly installments of principal and interest (adjusted to reflect the Corporation's servicing and guaranty fee) to Certificateholders, whether or not received.

Statutes governing depositories for county funds are found in chapter 116 of the Local Government Code. Statutes regarding the security for county funds held by the depository are contained in subchapter C thereof. Section 116.051, which speaks to qualifications as a depository, reads:

Within 15 days after the date a bank is selected as a county depository, the bank must qualify as the depository by providing security for the funds to be deposited by the county with the bank. The depository may secure these funds, at the option of the commissioners court, by:

(1) personal bond; surety bond; bonds, notes, and other securities; first mortgages on real property; real property; or a combination of these methods, as provided by this subchapter; or

(2) investment securities or interests in them as provided by Chapter 726, Acts of the 67th Legislature, Regular Session, 1981 (Article 2529b-1, Vernon's Texas Civil Statutes).

The section 116.051 reference to "bonds, notes, and other securities" in subsection (1) is exceedingly broad, but, as the "Revisor's Note" accompanying the code section explains, the list in subdivision (1) is based on the source law to sections 116.052-116.056. Section 116.054 narrows the breadth of the section 116.051 provision. It reads:

(a) A county depository may pledge with the commissioners court as security under this subchapter:

(1) a bond, note, security of indebtedness, or other evidence of indebtedness of the United States if the evidence of indebtedness is supported by the full faith and credit of the United States or is guaranteed as to principal and interest by the United States;

(2) a bond of this state or of a county, municipality, independent school district, or common school district;

(3) a bond issued under the federal farm loan acts;

(4) a road district bond;

(5) a bond, pledge, or other security issued by the board of regents of The University of Texas System;

(6) bank acceptances of banks having a capital stock of at least $500,000;

(7) a note or bond secured by mortgages insured and debentures issued by the Federal Housing Administration;

(8) shares or share accounts of a savings and loan association organized under the laws of this state or of a federal savings and loan association domiciled in this state if the payment of the share or share accounts is insured by the Federal Savings and Loan Insurance Corporation; or

(9) a bond issued by a municipal corporation in this state.

(b) Securities provided under this section must have a total market value equal to the amount of the depository bond. (Emphasis added.)[1]

The certificates at issue here satisfy none of the section 116.054, subsection (1), requirements, and unless they qualify as "investment securities or interests" as provided by [article 2529b-1, V.T.C.S.], as stated in subsection (2) of section 116.051, they do not fall within the statutory categories of acceptable security for county deposits.

[1] The Local Government Code was enacted by Acts 1987, 70th Legislature chapter 149, at 707 as a non-substantive recodification of existing laws. Sections 311.031(c) and (d) of the Government Code provide that when a statute is amended by the same legislature that repeals the statute in the process of enacting a code, the amendment is preserved and given effect and if the statute, as amended, conflicts with the code, the statute prevails. Section 116.051 was partially derived from former article 2547, which was amended by Acts 1987, 70th Legislature chapter 846, without reference to the repeal of the statute by enactment of the code. The amendment, which authorizes the pledge of certain certificates of deposit by banks to secure county deposits, does not conflict with the code or affect the answer to your question, when given effect.

In its entirety, article 2529b-1, V.T.C.S., reads:

Section 1. The following terms, used in this Act, have the meanings set forth below:

(a) 'Government securities' means direct obligations of the United States of America, obligations which in the opinion of the attorney general of the United States are general obligations of the United States and backed by its full faith and credit, obligations guaranteed by the United States of America, evidence of indebtedness of or participation certificates guaranteed by Federal Intermediate Credit Banks, Federal Land Banks, Banks for Cooperatives, Federal Farm Credit System, Federal Home Loan Banks, including letters of credit issued by the district Federal Home Loan Banks, general obligation notes of the Federal Home Loan Bank System, and general obligation bonds of the Federal Home Loan Bank System, Federal National Mortgage Association, Federal Financing Bank Participation Certificates in the Federal Asset Financing Trust, New Housing Authority Bonds and Project Notes fully secured by contracts with the United States of America provided such terms shall not include any obligation with a declining principal balance.

(b) 'Investment securities' means (i) government securities or (ii) any general or special obligation issued by a public agency (approved by the attorney general of Texas) payable from taxes, revenues, either or both.

(c) 'Public agency' means any board, authority, agency, department, commission, political subdivision, municipal corporation, district, public corporation, body politic, or instrumentality of the State of Texas, including without limitation any county, home-rule charter city, general-law city, town, or village, any state-supported educational institution of higher learning, any school, junior college, hospital, water, sewer, waste disposal, pollution, road, navigation, levee, drainage, conservation, reclamation, or other district or authority, and any other type of political or governmental entity of the State of Texas.

Sec. 2. Investment securities or any ownership or beneficial interest therein shall be eligible and lawful security for all deposits of public funds of the State of Texas and any public agency to the extent of the market value thereof.

Sec. 3. The provisions of this Act shall be cumulative of all other existing laws, but shall be full and complete authority for investment securities to be eligible to secure public funds without reference to any other law. (Emphasis added.)

The syntax of section 1(a) of article 2529b-1, V.T.C.S., is complex and might be analyzed in different ways, but we have concluded that it should be read as though the phrase "including letters of credit issued by the district Federal Home Loan Banks, general obligation notes of the Federal Home Loan Bank System, and general obligation bonds of the Federal Home Loan Bank System" were set off by parentheses. This phrase applies only to securities of Federal Home Loan Banks, but it is so long that it interrupts the list of entities whose evidence of indebtedness in participation certificates are government securities. As so punctuated, the provision reads:

(a) 'Government securities' means direct obligations of the United States of America, obligations which in the opinion of the attorney general of the United States are general obligations of the United States and backed by its full faith and credit, obligations guaranteed by the United States of America, evidence of indebtedness of or participation certificates guaranteed by Federal Intermediate Credit Banks, Federal Land Banks, Banks for Cooperatives, Federal Farm Credit System, Federal Home Loan Banks (including letters of credit issued by the district Federal Home Loan Banks, general obligation notes of the Federal Home Loan Bank System, and general obligation bonds of the Federal Home Loan Bank System), Federal National Mortgage Association, Federal Financing Bank Participation Certificates in the Federal Asset Financing Trust, New Housing Authority Bonds and Project Notes fully secured by contracts with the United States of America provided such terms shall not include any obligation with a declining principal balance. (Emphasis added.)

This reading of subsection 1(a) of the statute causes certificates "guaranteed by the . . . Federal National Mortgage Association" to be "government securities" and thus "investment securities" under subsection 1(b). Section 2 of the statute declares that any ownership or beneficial interest in investment securities is eligible and lawful security for all deposits of public funds of any public agency to the extent of the market value thereof. Counties are "public agencies" within the meaning of the act. V.T.C.S. art. 2529b-1, § 1(c).

Our conclusion that the certificates at issue may be pledged as security for the deposit of Dallas County funds is based upon our understanding of the legislative intent. Punctuation does not control or affect the matter. Gov't Code § 312.012(b). It is the duty of courts, and of this office, to give statutes a reasonable, fair construction with a view to accomplishing such intent. See 53 Tex. Jur.2d Statutes § 126, at 187. The legislative intent here is clearly to protect public funds by requiring that deposits of them be secured by safe evidences of obligation.

Influencing our conclusion that the legislature regarded certificates guaranteed by "Fannie Mae" as safe is the circumstance that, under federal law, such certificates

'shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority and control of the United States or an officer thereof.'

12 U.S.C. § 1723(c).

Consequently, we advise that Federal National Mortgage Association Guaranteed Mortgage Pass-Through Certificates may be pledged by the depository for Dallas County as security for the deposit of county funds placed with the depository.

SUMMARY

Federal National Mortgage Association Guaranteed Mortgage Pass-Through Certificates may be pledged by the depository for Dallas County as security for the deposit of county funds placed with the depository.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Bruce Youngblood
Assistant Attorney General